##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from _________ to _________
 Commission file number 001-16265
 
 ELECTRIC CITY CORP.
  Delaware
    
    36-4197337(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
 (847) 437-1666
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
 o þ
  o þ




---



ELECTRIC CITY CORP.
FORM 10-Q  For The Quarter Ended September 30, 2005
 INDEX
  
 PageNumberPart I Financial InformationITEM 1. Financial Statements:Condensed
Consolidated Balance Sheets
September 30, 2005 (unaudited) and December 31, 2004
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2005 and 2004 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Nine months Ended September 30, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Nine months Ended September 30, 2005 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Nine months Ended September 30, 2005 and 2004 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    19ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4. Control and Procedures
    
    
    29Part II. Other Information:ITEM 2. Changes in Securities
    
    
    30ITEM 6. Exhibits
    
    
    30Signatures
    
    
    30Certificate of CEOCertificate of CFOCertification of CEOCertification of CFO




---



##### Table of Contents



ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 302005
    
    
    December 31,(unaudited)
    
    
    2004 (1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    1,574,368
    
    
    $
    1,789,808Accounts receivable, net
    
    
    1,010,948
    
    
    
    1,067,104Inventories
    
    
    1,573,106
    
    
    
    1,029,645Advances to suppliers
    
    
    449,049
    
    
    
    Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    42,876
    
    
    
    Prepaid expenses and other
    
    
    202,423
    
    
    
    90,727Total Current Assets
    
    
    4,852,770
    
    
    
    3,977,284Net Property and Equipment
    
    
    2,487,474
    
    
    
    1,985,561Deferred Financing Costs
    
    
    29,888
    
    
    
    99,902Intangibles, net
    
    
    2,137,747
    
    
    
    Cost in Excess of Assets Acquired
    
    
    4,602,557
    
    
    
    416,573$
    14,110,436
    
    
    $
    6,479,320
 -1-




---



##### Table of Contents



ELECTRIC CITY CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2005
    
    
    December 31,(unaudited)
    
    
    2004 (1)Liabilities and Stockholders EquityCurrent LiabilitiesLine of Credit
    
    $
    2,000,000
    
    
    $
    Current maturities of long-term debt
    
    
    984,222
    
    
    
    424,451Accounts payable
    
    
    1,022,413
    
    
    
    1,284,421Accrued expenses
    
    
    1,078,219
    
    
    
    567,689Notes payable
    
    
    201,265
    
    
    
    Deferred revenue
    
    
    714,105
    
    
    
    437,419Customer deposits
    
    
    1,456,648
    
    
    
    1,000,000Total Current Liabilities
    
    
    7,456,872
    
    
    
    3,713,980Deferred Revenue
    
    
    820,693
    
    
    
    179,167Long-Term Debt, less current maturities, net of unamortized
discount of $14,973 and $50,048 at September 30, 2005 and
December 31, 2004, respectively
    
    
    2,604
    
    
    
    805,902Total Liabilities
    
    
    8,280,169
    
    
    
    4,699,049Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
Series E  232,773 and 224,752 issued and outstanding as of
September 30, 2005 and December 31, 2004,
respectively (liquidation value of $46,555,000 and
$44,950,000 at September 30, 2005 and December 31,
2004, respectively)
    
    
    2,328
    
    
    
    2,248Common stock, $.0001 par value; 200,000,000 shares
authorized, 50,813,503 and 41,612,610 issued as of
September 30, 2005 and December 31, 2004, respectively
    
    
    5,083
    
    
    
    4,163Additional paid-in capital
    
    
    63,862,725
    
    
    
    55,299,743Accumulated deficit
    
    
    (58,039,869
    )
    
    
    (53,525,883
    )Total Stockholders Equity
    
    
    5,830,267
    
    
    
    1,780,271$
    14,110,436
    
    
    $
    6,479,320
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2004
 See accompanying notes to condensed consolidated financial statements
 -2-




---



##### Table of Contents



ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended, September 30
    
    2005
    
    
    2004Revenue
    
    $
    1,312,584
    
    
    $
    571,780ExpensesCost of sales
    
    
    1,348,361
    
    
    
    625,092Selling, general and administrative
    
    
    1,900,785
    
    
    
    1,166,8313,249,146
    
    
    
    1,791,923Operating loss
    
    
    (1,936,562
    )
    
    
    (1,220,143
    )Other Income (Expense)Interest income
    
    
    16,880
    
    
    
    5,924Interest expense
    
    
    (94,413
    )
    
    
    (83,220
    )Total other income (expense)
    
    
    (77,533
    )
    
    
    (77,296
    )Net Loss
    
    
    (2,014,095
    )
    
    
    (1,297,439
    )Plus Preferred Stock Dividends
    
    
    (344,000
    )
    
    
    (445,634
    )Net Loss Available to Common Shareholder
    
    $
    (2,358,095
    )
    
    $
    (1,743,073
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.05
    )
    
    $
    (0.04
    )Weighted Average Common Shares Outstanding
    
    
    50,813,503
    
    
    
    41,467,028
 See accompanying notes to condensed consolidated financial statements
 -3-




---



##### Table of Contents



ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Nine months ended, September 30
    
    2005
    
    
    2004Revenue
    
    $
    3,845,338
    
    
    $
    1,943,559ExpensesCost of sales
    
    
    3,307,227
    
    
    
    2,008,184Selling, general and administrative
    
    
    4,667,615
    
    
    
    3,168,9407,974,842
    
    
    
    5,177,124Operating loss
    
    
    (4,129,504
    )
    
    
    (3,233,565
    )Other Income (Expense)Interest income
    
    
    42,167
    
    
    
    17,660Interest expense
    
    
    (426,649
    )
    
    
    (584,411
    )Total other income (expense)
    
    
    (384,482
    )
    
    
    (566,751
    )Net Loss
    
    
    (4,513,986
    )
    
    
    (3,800,316
    )Plus Preferred Stock Dividends
    
    
    (1,017,800
    )
    
    
    (4,232,539
    )Net Loss Available to Common Shareholder
    
    $
    (5,531,786
    )
    
    $
    (8,032,855
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.12
    )
    
    $
    (0.20
    )Weighted Average Common Shares Outstanding
    
    
    46,869,133
    
    
    
    39,326,768
 See accompanying notes to condensed consolidated financial statements
 -4-




---



##### Table of Contents



ELECTRIC CITY CORP.
 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
 (Unaudited)
 Series E
    
    
    Series E
    
    
    Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Preferred
    
    
    Preferred
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2004
    
    
    41,612,610
    
    
    $
    4,163
    
    
    
    224,752
    
    
    $
    2,248
    
    
    $
    55,299,743
    
    
    $
    (53,525,883
    )
    
    $
    1,780,271Conversion of Series E Preferred Stock
    
    
    215,700
    
    
    
    22
    
    
    
    (2,157
    )
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock (less issuance costs
of $216,787)
    
    
    6,250,000
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    5,407,588
    
    
    
    
    
    
    
    5,408,213Shares issued for acquisition of Maximum
Performance Group, Inc.
    
    
    2,509,708
    
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    2,710,234
    
    
    
    
    
    
    
    2,710,485Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,017,800
    )
    
    
    
    
    
    
    (1,017,800
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    10,178
    
    
    
    102
    
    
    
    1,017,698
    
    
    
    
    
    
    
    1,017,800Common stock issued for services received
    
    
    225,485
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    125,462
    
    
    
    
    
    
    
    125,484Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,800
    
    
    
    
    
    
    
    319,800Net loss for the nine months ended
September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,513,986
    )
    
    
    (4,513,986
    )Balance,September 30, 2005
    
    
    50,813,503
    
    
    $
    5,083
    
    
    
    232,773
    
    
    $
    2,328
    
    
    $
    63,862,725
    
    
    $
    (58,039,869
    )
    
    $
    5,830,267
 See accompanying notes to condensed consolidated financial statements. .
 -5-




---



##### Table of Contents



ELECTRIC CITY CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine months ended September 30
    
    2005
    
    
    2004Cash Flow from Operating ActivitiesNet loss
    
    $
    (4,513,986
    )
    
    $
    (3,800,316
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitionDepreciation and amortization
    
    
    373,147
    
    
    
    56,801Warrants issued in exchange for services received
    
    
    319,800
    
    
    
    39,500Amortization of deferred financing costs
    
    
    70,014
    
    
    
    352,926Amortization of original issue discount
    
    
    35,075
    
    
    
    176,806Accrued interest converted to common stock
    
    
    
    
    
    
    4,736Loss on disposal of fixed assets
    
    
    11,743
    
    
    
    Changes in assets and liabilities, net of acquisitionsAccounts receivable
    
    
    348,258
    
    
    
    400,987Inventories
    
    
    (217,339
    )
    
    
    (343,222
    )Advances to suppliers
    
    
    23,640
    
    
    
    Other current assets
    
    
    (90,961
    )
    
    
    (125,790
    )Accounts payable
    
    
    (1,190,517
    )
    
    
    (558,177
    )Accrued expenses
    
    
    (148,411
    )
    
    
    253,869Deferred revenue
    
    
    (93,404
    )
    
    
    4,296Other current liabilities
    
    
    (44,992
    )
    
    
    473,774Net cash used in operating activities
    
    
    (5,117,933
    )
    
    
    (3,063,810
    )Cash Flows Used In Investing ActivitiesAcquisition (including acquisition costs), net of cash acquired
    
    
    (1,644,419
    )
    
    
    Purchase of property and equipment
    
    
    (470,342
    )
    
    
    (13,241
    )Net cash used in investing activities
    
    
    (2,114,761
    )
    
    
    (13,241
    )Cash Flows Provided by Financing ActivitiesBorrowings on line of credit
    
    
    2,000,000
    
    
    
    Payment on long-term debt
    
    
    (390,959
    )
    
    
    (29,340
    )Preferred stock redemption
    
    
    
    
    
    
    (7,000,006
    )Proceeds from issuance of common stock
    
    
    5,625,000
    
    
    
    11,000,000Issuance costs related to stock issuances
    
    
    (216,787
    )
    
    
    (897,135
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    193,648Net cash provided by financing activities
    
    
    7,017,254
    
    
    
    3,267,167Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (215,440
    )
    
    
    190,116Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    1,574,368
    
    
    $
    2,657,139Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    140,648
    
    
    $
    63,784Value of warrants issued in exchange for services received
    
    
    319,800
    
    
    
    39,500
 -6-




---



##### Table of Contents



Nine months ended September 30
    
    2005
    
    
    2004Supplemental Disclosures of Noncash Investing and Financing ActivitiesConversion of convertible debt to common stock
    
    $
    
    
    
    $
    270,863Accrued interest satisfied through the issuance of common stock
    
    
    
    
    
    
    4,736Certain holders of Series E preferred stock converted 2,157
shares of Series E preferred
stock into 215,700 shares of the Companys common stock
during the first quarter of 2005
  Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Property and equipment
    
    
    121,608Intangible assets
    
    
    2,432,600Cost in excess of assets acquired
    
    
    4,185,984Total assets acquired
    
    
    7,894,716Accounts payable
    
    
    (928,509
    )Accrued expenses
    
    
    (658,940
    )Deferred revenue
    
    
    (1,011,616
    )Other current liabilities
    
    
    (525,675
    )Notes payable
    
    
    (289,587
    )Total liabilities assumed
    
    
    (3,414,327
    )Net assets acquired
    
    
    4,480,389Less valuation of shares issued for acquisition
    
    
    (2,710,485
    )Acquisition costs paid through the issuance of common stock
    
    
    (125,485
    )Total cash paid, including acquisition costs
    
    $
    1,644,419
 See accompanying notes to condensed consolidated financial statements
 -7-




---



##### Table of Contents



Electric City Corp.
 
 Notes to Financial Statements
 Note
1  Basis of Presentation
     Note 2  Stock-based Compensation
  -8-




---



##### Table of Contents



Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Net Loss, as reported
    
    $
    (2,014,000
    )
    
    $
    (1,297,000
    )
    
    $
    (4,514,000
    )
    
    $
    (3,800,000
    )Deduct: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Add: Total stock-based
employee compensation (expense)
income determined under fair value
based method for awards 1
    
    
    (160,000
    )
    
    
    (249,000
    )
    
    
    (664,000
    )
    
    
    (777,000
    )Net Loss, pro-forma
    
    
    (2,174,000
    )
    
    
    (1,546,000
    )
    
    
    (5,178,000
    )
    
    
    (4,577,000
    )Preferred stock dividends
    
    
    (344,000
    )
    
    
    (446,000
    )
    
    
    (1,018,000
    )
    
    
    (4,233,000
    )Net Loss Available to
Common Shareholder
    
    $
    (2,518,000
    )
    
    $
    (1,992,000
    )
    
    $
    (6,196,000
    )
    
    $
    (8,810,000
    )Net loss per shareBasic and
diluted 
as reported
    
    $
    (0.05
    )
    
    
    (0.04
    )
    
    $
    (0.12
    )
    
    
    (0.20
    )Basic and
diluted 
pro-forma
    
    $
    (0.05
    )
    
    
    (0.05
    )
    
    $
    (0.13
    )
    
    
    (0.22
    )
 1
    
    All awards refer to awards granted, modified, or settled in fiscal periods beginning after December 15, 1994
 that is, awards for which the fair value was required to be measured and disclosed under Statement 123.
  Note
3  Revenue Recognition
   -9-




---



##### Table of Contents



Note 4  Recent Accounting Pronouncements
  -10-




---



##### Table of Contents



Note
5  Acquisition of Maximum Performance Group, Inc.
      -11-




---



##### Table of Contents



Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Net property and equipment
    
    
    121,608Identifiable intangible assets
    
    
    2,432,600Goodwill
    
    
    4,185,984Accounts payable
    
    
    928,509Accrued expenses
    
    
    658,940Deferred revenue
    
    
    1,011,616Other current liabilities
    
    
    525,675Notes payable
    
    
    289,587
  Nine months endedSeptember 30,2005Revenue:As Reported
    
    $
    3,845,338Pro-forma
    
    
    4,995,085Net Loss:As Reported
    
    
    (4,513,986
    )Pro-forma
    
    
    (5,165,039
    )Basic and Diluted Loss per Share:As Reported
    
    
    (0.12
    )Pro-forma
    
    
    (0.13
    )
 Note
6  Net Loss Per Share
  -12-




---



##### Table of Contents



Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average shares
issuable upon exercise of
outstanding options
    
    
    11,856,754
    
    
    
    10,776,000
    
    
    
    11,577,491
    
    
    
    10,590,000Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    14,532,992
    
    
    
    11,262,000
    
    
    
    13,160,723
    
    
    
    10,904,000Weighted average shares
issuable upon conversion
of preferred stock
    
    
    22,937,039
    
    
    
    21,682,000
    
    
    
    22,622,248
    
    
    
    23,438,000Weighted average shares
issuable upon conversion of
convertible debt
    
    
    2,168,280
    
    
    
    350,000
    
    
    
    1,828,336
    
    
    
    339,000Total
    
    
    51,495,065
    
    
    
    44,070,000
    
    
    
    49,188,798
    
    
    
    45,271,000
  Note 7  Warranty Obligations
  -13-




---



##### Table of Contents



Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Balance, beginning of period
    
    $
    206,895
    
    
    $
    128,182
    
    
    $
    151,008
    
    
    $
    121,702Warranties issued
    
    
    24,000
    
    
    
    10,000
    
    
    
    105,798
    
    
    
    22,750Settlements
    
    
    (10,741
    )
    
    
    (1,026
    )
    
    
    (36,652
    )
    
    
    (7,296
    )Balance, as of September 30
    
    $
    220,154
    
    
    $
    137,156
    
    
    $
    220,154
    
    
    $
    137,156
 Note 8  Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    1,026,315
    
    
    $
    528,718Work in process
    
    
    3,500
    
    
    
    Finished goods
    
    
    543,291
    
    
    
    500,927$
    1,573,106
    
    
    $
    1,029,645
 Note
9  Line of Credit
  -14-




---



##### Table of Contents



Note 10  Dividends
  Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Accrual of Dividend on Series
A Convertible Preferred
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    540,705Accrual of Dividend on Series
C Convertible Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,206Accrual of Dividend on Series
D Convertible Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,932Accrual of Dividend on Series
E Convertible Preferred
    
    
    344,000
    
    
    
    325,280
    
    
    
    1,017,800
    
    
    
    678,937Deemed dividend associated
with beneficial conversion
price on shares issued in
satisfaction of convertible
preferred dividends
    
    
    
    
    
    
    120,354
    
    
    
    
    
    
    
    1,048,301Deemed dividend associated
with the redemption and
exchange of outstanding
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,860,458Deemed dividend associated
with change in the
expiration date of warrants
to purchase shares of
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Total
    
    $
    344,000
    
    
    $
    445,634
    
    
    $
    1,017,800
    
    
    $
    4,232,539
 -15-




---



##### Table of Contents



Note
11  Business Segment Information
     Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Energy Technology
    
    $
    1,125,000
    
    
    $
    98,000
    
    
    $
    2,925,000
    
    
    $
    594,000Building Automation
Controls
    
    
    189,000
    
    
    
    475,000
    
    
    
    921,000
    
    
    
    1,377,000Intercompany
sales 
Energy Technology
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    (25,000
    )Intercompany
sales 
Building Control and
Automation
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (2,000
    )Total
    
    
    1,313,000
    
    
    
    572,000
    
    
    
    3,845,000
    
    
    
    1,944,000Operating Loss:Energy Technology
    
    
    (1,462,000
    )
    
    
    (651,000
    )
    
    
    (3,041,000
    )
    
    
    (1,684,000
    )Building Automation
Controls
    
    
    (61,000
    )
    
    
    (113,000
    )
    
    
    36,000
    
    
    
    (344,000
    )Corporate Overhead
    
    
    (413,000
    )
    
    
    (456,000
    )
    
    
    (1,125,000
    )
    
    
    (1,205,000
    )Total
    
    
    (1,936,000
    )
    
    
    (1,220,000
    )
    
    
    (4,130,000
    )
    
    
    (3,233,000
    )Interest Expense, net
    
    
    (78,000
    )
    
    
    (77,000
    )
    
    
    (384,000
    )
    
    
    (567,000
    )Net Loss
    
    
    (2,014,000
    )
    
    
    (1,297,000
    )
    
    
    (4,514,000
    )
    
    
    (3,800,000
    )
 -16-




---



##### Table of Contents



September
    
    
    December30, 2005
    
    
    31, 2004Total Assets:Energy Technology
    
    $
    13,243,000
    
    
    $
    5,168,000Building Automation
Controls
    
    
    867,000
    
    
    
    1,311,000Total
    
    $
    14,110,000
    
    
    $
    6,479,000
 Note
12  Equity Issuances
 (a)
    
    During the first nine months of 2005, two holders of the Companys Series E Convertible
Preferred Stock converted 2,157 shares of Series E Convertible Preferred Stock into 215,700
shares of common stock.
 (b)
    
    During February 2005, the Company issued a five year warrant to purchase 30,000 shares at
$1.03 to Delano Group Securities, LLC, a company owned by Mr. David Asplund, one of the
Companys directors pursuant to an agreement to provide investment banking services. The
warrant was valued at $13,200 using a modified Black-Sholes option pricing model utilizing the
following assumptions: risk free rate of 2.53%, expected volatility of 45.3%, expected
dividend of $0 and expected life of 5 years. The warrant was charged to operations during the
period.
 (c)
    
    During March 2005, the Company issued a three year warrant to purchase 100,000 options at
$1.13 per share to M&A Railroad and Electric Supply, LLC (M&A) as part of a settlement
agreement. This warrant was valued at $35,000 using a modified Black-Sholes option pricing
model utilizing the following assumptions: risk free rate of 2.767%, expected volatility of
45.0%, expected dividend of $0 and expected life of 3 years. Of the total warrant value,
$33,000 was charged to operations during the fourth quarter of 2004 and $2,000 was charged to
operations during the first quarter of 2005.
 (d)
    
    On April 28, 2005 Electric City issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 6,250,000 shares of the Companys common stock and 42
month warrants to purchase 3,125,000 additional shares of common stock at $1.05 per share
(collectively the PIPE Transaction or the PIPE). Warrants to purchase 2,100,000 shares of
common stock are immediately exercisable and the remaining warrants become exercisable six
months after closing. Net proceeds from the transaction were approximately $5,408,000, of
which approximately $1,644,000 was used to fund the acquisition of Maximum Performance Group,
Inc., as discussed in Note 5. A registration statement to register these shares was declared
effective by the SEC on October 20, 2005, meeting the requirements of the Security Purchase
Agreement.Delano Group Securities LLC and Mr. David Valentine acted as advisors on the PIPE Transaction.
The Company paid Delano Group Securities LLC $16,250 and 50,000 shares of common stock and Mr.
Valentine 50,000 shares of common stock for their services. Mr. Asplund and Mr. Valentine both
serve as directors of Electric City.
 (e)
    
    On May 3, 2005, pursuant to an Agreement and Plan of Merger dated as of April 28, 2005, by
and among Electric City Corp., MPG Acquisition Corporation (the Merger Subsidiary), a
wholly-owned subsidiary of Electric City, and Maximum Performance Group, Inc. (MPG),
Electric City acquired MPG pursuant to the merger of MPG with and into Merger Subsidiary, with
Merger Subsidiary continuing as the surviving corporation under the name Maximum Performance
Group, Inc. The merger consideration, subject to post closing adjustment, consisted of
$1,643,525 in cash, 2,509,708 shares of Electric City common stock
and 2,509,708 additional shares which were placed
 -17-




---



##### Table of Contents



in escrow. If MPGs revenues during the two years following the merger exceed an aggregate of
$5,500,000 the escrow shares will be released to the former stockholders of MPG at the rate of
202 shares for every $1,000 of revenue in excess of such amount. The escrow shares are also
available to satisfy any indemnification claims which the Company may have under the Merger
Agreement. If the shares are not released to the selling shareholders of MPG pursuant to this
revenue earnout during the two year period they will be returned to the Company. As a part of
the transaction the former stockholders of MPG entered into a stock trading agreement with the
Company which restricts their ability to sell shares of the Companys common stock under certain
circumstances.During October 2005 Electric City and the selling shareholders agreed on the final post closing
adjustments to the purchase price, which resulted in a $46,405 reduction in the total
consideration due the sellers. The final consideration after the post closing adjustments
consisted of $1,632,079 in cash, 2,492,229 shares of Electric City common stock and 2,492,229
escrow shares.Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 125,485 shares of common stock for its services. These shares were valued at $1.00 per
share, which was the closing market price of the Companys common stock on April
28th. In addition, the Company may issue up to 125,485 additional shares of common
stock to Delano as the MPG shares held in escrow are released. Delano Group Securities LLC is
owned by Mr. David Asplund, one of Electric Citys directors.
 (f)
    
    The Company issued a warrant to purchase 400,000 shares of its common stock to Laurus Master
Fund, Ltd. in exchange for its consent to the Company entering into the PIPE Transaction and
acquiring MPG, as well as waiving its right to adjust the conversion price on its convertible
term note and convertible revolving note. The warrant has an exercise price of $1.00 per
share and a term of five years. The warrant was valued at $160,000 using a modified
Black-Sholes option pricing model utilizing the following assumptions: risk free rate of
2.941%, expected volatility of 43.7%, expected dividend of $0 and expected life of 5 years.
The value of the warrant was charged to interest expense during the period.
 (g)
    
    During the first nine months of 2005, the Company issued warrants to consultants to purchase
410,000 shares of common stock with an exercise prices between $1.00 and $1.03 per share and
terms of three to ten years. The warrants were valued collectively at $144,600 using a
modified Black-Sholes option pricing model utilizing the following assumptions (depending on
the warrant being valued): risk free rate of 2.366% to 3.029%, expected volatility of 40.7% to
46.5%, an expected dividend of $0 and an expected life of 3 to 10 years. The values of the
warrants were charged to operations during the period.
 (h)
    
    During the first nine months of 2005, the Board of Directors declared dividends payable on
the Companys Series E Convertible Preferred Stock of $1,017,800. The dividends were paid with
10,178 additional shares of Series E Convertible Preferred Stock. Each share of Series E
Convertible Preferred Stock is convertible into 100 shares of the Companys common stock.
 -18-




---



##### Table of Contents



ITEM 2.
   MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
     -19-




---



##### Table of Contents




    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our non-manufacturing management, supervisory and staff salaries and
employee benefits;
    
    commission costs related to our independent sales representatives and our distributors;
    
    costs related to insurance, travel and customer entertainment and office supplies costs
and the cost of non-manufacturing utilities;
    
    costs related to marketing and advertising our products;
    
    costs of outside professionals such as lawyers, accountants, and investor relations
professionals;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the existing businesses
of the Company, as well as to provide the infrastructure for future growth.
  Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004.
   -20-




---



##### Table of Contents



-21-




---



##### Table of Contents



Nine months Ended September 30, 2005 Compared to Nine months Ended September 30, 2004.
      -22-




---



##### Table of Contents



1 2
 -23-




---



##### Table of Contents



Liquidity and Capital Resources
     Nine months ended September 30,
    
    2005
    
    
    2004Net cash used in operating activities
    
    $
    (5,117,933
    )
    
    $
    (3,063,810
    )Net cash used in investing activities
    
    
    (2,114,761
    )
    
    
    (13,241
    )Net cash provided by financing activities
    
    
    7,017,254
    
    
    
    3,267,167Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (215,440
    )
    
    
    190,116Cash and Cash Equivalents, at beginning of period
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    1,574,368
    
    
    $
    2,657,139
 -24-




---



##### Table of Contents



Nine months Ended September 30, 2005 Compared to Nine months Ended September 30, 2004.
  Operating Activities
   Investing Activities
   -25-




---



##### Table of Contents



Financing Activities
   LIQUIDITY
       -26-




---



##### Table of Contents




    
    Successfully execute on our ComEd and PacifiCorp VNPP contracts. We believe that this
is important from several different perspectives. We believe that these contracts can
establish Electric City as a leader in negative power development, thereby creating VNPP
opportunities with other utilities. We also believe that these projects will lead to
increased commercial sales of the EnergySaver as host customers who participate in the VNPP
programs with operations outside the territories covered by the VNPPs gain exposure to the
technology. We have already seen VNPP host customers place such direct orders for
EnergySaver systems. Both of the ComEd and PacifiCorp projects are currently under
contract, therefore we are focusing a great deal of our resources on these projects, though
shipments will continue to be limited until we arrange for long term financing. We
estimate that the cost to completely build-out the ComEd and PacifiCorp projects will be
between $30 million to $40 million, most of which will be funded through long-term
financing arrangements. This financing will most likely be raised in several pieces over
time as the projects progress.
    
    Increase the profitability of EnergySaver sales. Increasing the margins earned on
EnergySaver sales will also have an immediate and positive impact on our cash flow. We
have seen improvements in EnergySaver margins at times over the past three years with
increases in volume. We believe that increased volumes that will result from the VNPP
programs should lead to consistently higher margins as a result of increased capacity
utilization.
    
    Expand the sales of eMAC equipment and monitoring sales. We believe that the eMAC
product line has the potential to earn margins that exceed those of any other product we
currently sell. To realize the benefit of these margins we need to greatly expand the
sales of the product from the levels realized to date.
    
    Secure additional VNPP projects. We are currently in discussions with several utilities
regarding implementing VNPP programs in their service territories. Recent legislative
actions by some states are encouraging or mandating utilities to include demand reduction
goals in their long term energy plans. We believe we are well positioned to take advantage
of these new requirements.
    
    Expand and improve the product line through internal development or acquisition. We
would like to develop or acquire additional cost effective demand response technology that
we can incorporate into our VNPP offering and we want to find ways to reduce the cost of
our current technology. The recently completed acquisition of Maximum Performance Group, a
manufacturer of an air conditioning control technology, is directly related to this
strategy.
    
    Build on the recent project successes at Great Lakes Controlled Energy to make the
Building Controls and Automation business grow and become profitable. Great Lakes has
recently successfully completed certain projects which have contributed to improvements in
our overall profitability and cash flow. Great Lakes successful execution on these
projects has led to opportunities to bid on other significant projects. If this segment
continues to improve as it has during the last two years, we believe this segment could
record a profit for the full fiscal year 2005 and is positioned to be profitable in future
years.
    
    Continue to aggressively manage our costs in order to conserve cash. While we made
significant progress in reducing our costs during the last several years, we must continue
to effectively manage all of our costs so that they do not negate the improvements in
profitability we are working to create in our Energy Technology and Building Automation and
Control segments.
 -27-




---



##### Table of Contents




    
    Secure additional capital to fund our VNPP initiatives and to continue to fund
operations until the business turns cash flow positive. Our ability to raise additional
capital in the future will depend a great deal on our ability to make progress toward the
goals outlined above.
   Cautionary Note Regarding Forward-Looking Statements
  -28-




---



##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
 1 2
 
 Controls and Procedures
 a.
    
    Evaluation of disclosure controls and procedures.Our chief executive officer and chief financial officer, after evaluating the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of
the period covered by the report, have concluded that our disclosure controls and procedures
were effective as of the end of the period covered by the report.b.
    
    Changes in internal controls.There were no significant changes in our internal controls or in other factors that could
significantly affect the Companys internal controls during the period covered by the
report.c.
    
    Disclosure controls and procedures.Disclosure controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
 -29-




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Changes in Securities
 (1)
    
    On October 4, 2005, our Board of Directors declared dividends payable on our Series E
Convertible Preferred Stock for the calendar quarter ending September 30, 2005 to
shareholders of record of the Series E Convertible Preferred Stock as of September 30,
2005. The dividends were paid with 3,440 additional shares of Series E Convertible
Preferred Stock. Each share of Series E Convertible Preferred Stock is convertible into
100 shares of our common stock.
 
 Exhibits.
 31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 SIGNATURES
  ELECTRIC CITY CORP.:Dated: November 10, 2005
    By:
    /s/ John MitolaJohn MitolaChief Executive Officer (principal
executive officer) Dated: November 10, 2005
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) -30-